1. The name of the organisation, the industry it operates in and the issue relevant to ethics and corporate governance with which it was connected.
a. What were the conditions at the organisation that led to this example of poor corporate governance? (5 marks)
b. What were the outcomes for the board of directors, the shareholders, the staff of the organisation, its customers and the general public? (5 marks)
The processes and structures for control and direction of firms is corporate governance. It is concerned with the associations between board of directors, management, control of major and minor shareholders and other relevant stakeholders. Excellent corporate governance and ethics promotes sustainable economies by improving firm performance (International Financial Corporation, 2013).
One of the major collapses in the corporate enterprise was witnessed with the failure of One Tel in the year 2001 in Australia. It was operating in around eight nations and had risen to become the fourth largest telecommunication conglomerate in the continent having over 2 million clients during the time when the company shutdown (Australian Broadcasting Corporation, 2001). Several analysis and academic works suggest that the collapse of One Tel is attributed to a series of factors including unbridled growth, incorrect pricing policy, strategic errors and failed expectations. The meteoric growth and subsequent downfall of One Tel has been linked with severe weaknesses in corporate governance like deficiencies in financial reporting, internal control, management scrutiny conducted by the board, bad executive performance pay association and deficient management and board communication.
The collapse of the organization has revealed several deficiencies in corporate governance and ethical collapse in the leadership positions. The board of directors have become defunct and the Australian Securities and Investment Commission (ASIC) agents are trying to recover information related to unethical practices conducted by the board of directors. The shareholders, employees of the organization and the general public have been shocked by the sudden downfall of the company. Money worth millions has been lost and around 1400 employees were suddenly rendered jobless with the collapse of the company. However, the firm had managed to protect significant company executives and creditors. Small creditors have faced bankruptcy and will not receive anything following the sudden collapse of the telecommunication giant (Barkham, 2001).
2. Show how Australian corporate governance legislation or associated instruments can be effective in maintaining good governance. In your answer, you may wish to consider the following: (5 marks)
a. The Australian Corporations Act (2001).
b. ASX principles of good corporate governance.
c. ASIC / CLERP 9.
d. Codes of ethics and behaviour.
The corporate governance functions conducted by ASX have been engaged in a leadership function since the year 2002 by bringing together several suggestions and recommendations from industry groups, shareholders and business enterprises. It has proposed several recommendations and amendment to the previous ASX corporate governance principles. One of the recommendations made is that the board of directors of a particular organization should comprise of independent directors. This recommendation has come in the light of activities conducted by the founder of One Tel, Jodee Rich who played an important function in shaping the opinions of the board about the performance of the organization (ASIC v Rich, 2009). This suggested that the board of directors were controlled by a single individual and this recommendation will help in diluting this stance.
The recent corporate scandals have led to the requirement for creating effective ethical codes of conduct and behaviour especially for the board members and senior management team for upholding the reputation, integrity and ethical conduct of organizations (Rodrigues-Dominguez, Gallego-Alvarez & Garcia-Sanchez, 2009).
The ASX is trying to provide efficient corporate governance structures by supporting firms to develop value by innovation, entrepreneurialism, exploration and development and accordingly has devised several control systems to augment accountability and thereby mitigate the involved risks. The codes of ethics and behaviour devised by ASX has been formulated keeping in mind the board of directors and senior management members in view to protect integrity and promote ethical practices in business enterprises. For effective compliance to the ethical codes of behaviour and conduct, this body supports and encourages business enterprise to comply with certain recommendations and principles which have been revised post several scandals and scams that have rocked the Australian corporate world (ASX, 2007).
For effective compliance to codes of ethics and behaviour the ASX, ASIC and other corporate governance bodies have formulated concrete foundations for management by adding structuring the board of directors to add value, encouraging responsible and ethical decision making principles, safeguarding integrity aspect in financial reporting, recommending balanced and timely disclosure, identify and handle hazards, respecting the shareholders rights and provide responsible and fair remuneration.
3. There is disagreement over whether current legislation (SOX and Australian equivalents) will be as effective as it was meant to be in encouraging good corporate governance. Provide a thesis as to whether you believe that the current legislation and instruments for good corporate governance will be effective over the next decade. (5 marks)
a. In this section, please be reminded that a thesis consists of 2 components:
i. An opinion
ii. Evidence for your opinion. This must clearly support your opinion.
The Sarbanes-Oxlay Act (SOX) was formulated as a reaction to major corporate scandals of Enron and Worldcon. The SOX law enforced heavy costs and duties on accounting and public limited firms and after ten years there is still a debate raging on as to whether the focus, money and the time lost for adhering to the SOX law has led to yield potential benefits in good corporate governance practice (Maleske, 2012). A similar stance has been taken by the corporate governance legislation in Australia post ethical failures leading to the shutdown of major firms. According to Segal (2002), ‘corporate failure does not necessarily imply poor standards of governance’. Despite this statement, it is necessary for corporate governance to be vigilant and recognize challenges requiring the integrity improvement of the corporate surroundings.
This has led to the enforcement of certain structures like ‘corporate senate’ and ‘unitary board’. However corporate governance is a dynamic concept and hence the procedures and policies surrounding the corporate governance structures should be evaluated and monitored from time to time. It is important to train the senior management team in maintaining certain codes and standards of ethics while conducting business practices.
The stringent policies and practices which have been enforced following the collapse of One Tel have led to believe that Australia needs to conduct excellent corporate governance functions and has already started embarking on this step. An important function is played by auditors especially in the collapse of certain organizations. This warrants the fact that the performance and functions of auditors should be closely scrutinized. The ASIC has conducted a survey of the top 100 firms in Australia to garner data on the current practices in audit and other financial activities. Also reforms and recommendations in audit should consider a broader understanding of independence in audit systems and a comprehensive understanding and aspirations of the community from the audit professionals. Investors need to determine the level of rigorousness and investigation that needs to be conducted in corporate audits and a possible budget for the same. This is because one of the significant considerations in this case is the cost of audit (ASIC, 2010). In the wake of the recent business scandals and subsequent closures, the ASIC has stringently and frequently intervened on the disclosures related to corporate finances. As per the regulations framed by ASX Listing Rules and Corporations Act the corporate governance bodies are concerned with the continuous disclosures relating to company finances. The introduction and enhanced vigilance of company finances disclosures led to the improvement of regulations related to insider trading.
The ASIC has zealously worked in order to enhance corporate disclosures to prevent further ethical mishaps. It has provided an education strategy which emphasizes on superannuation, general investment guidelines and planning for retirement, insurance, e-commerce, financial exclusion and literacy, resolution of conflicts, credit and consumer rights. The body is further striving to aid consumers to evade financial rip-offs and scams.
4. Outline at least one possible negative implication as a result of increased regulation and legislation for corporate governance. (5 marks)
There is one possible negative implication of increased corporate governance. This is the issue of corruption and nepotism. According to market enthusiasts, rules of corporate governance have changed from the mandatory pricing framework to a framework for free market thereby bringing in considerable modification to corruption. Corruption may be practiced while viewing the legal compliances and increased legislation surrounding corporate governance (Wu, 2005).
Australia is facing increased issues with respect to bribery of the foreign public officials as a direct outcome to increased corporate governance legislation. This is despite the formulation of certain measures supporting ethical business procedures and prosecution of individuals engaging in unethical practices like corruption (Department of Foreign Affairs and Trade, 2013). Several legislations have been conducted with reference to bribery accepted by foreign officials in Australia or worldwide Australian enterprises. In fact the diverse corporate governance bodies are trying to emphasize on particular leadership teams to inform and educate business response and take ethical stands to fight the serious increase in corruption levels in business practices following increased legislations in corporate governance.
Reference
ASIC. (2010). 10-34 AD ASIC not to appeal One.Tel decision. Retrieved 11, June 2013 from http://www.asic.gov.au/asic/asic.nsf/byheadline/10-34AD+ASIC+not+to+appeal+One.Tel+decision?openDocument
ASX Group. (2013). ASX Corporate Governance Council. Retrieved 11, June 2013 from http://www.asxgroup.com.au/corporate-governance-council.htm
ASX. (2007). Corporate Governance Principles and Recommendations with 2010 Amendments. ASX Corporate Governance Council, Australia.
Australian Broadcasting Corporation. (2001). The Year of Corporate Collapses’(Reporter: Alan Kohler). Retrieved 11, June 2013 from http://www.abc.net.au/7:30/content/2001/s445523.htm
Barkham, P., 2001. One.Tel boss in pledge to pay back £2.5m bonus, The Guardian, Retrieved 11, June 2013 from http://www.guardian.co.uk/business/2001/jun/05/12
International Financial Corporation. (2013). About Corporate Governance. Retrieved 11, June 2013 from http://www1.ifc.org/wps/wcm/connect/Topics_Ext_Content/IFC_External_Corporate_Site/Corporate+Governance
Maleske, M. (2012). 8 ways SOX changed corporate governance, Inside Counsel. Retrieved 11, June 2013 from http://www.insidecounsel.com/2012/01/01/8-ways-sox-changed-corporate-governance
Rodrigues-Dominguez, L., Gallego-Alvarez, I. & Garcia-Sanchez, I.M. (2009). Corporate governance and codes of ethics. Journal of Business Ethics, 90, 187 – 202.
Wu, X. (2005). Corporate governance and corruption: a cross country analysis. International Journal of Policy, Administration and Institutions, 18(2), 151 – 170.
